A Carrot and Stick Approach to Leniency and Compliance Programs

Since I attended the International Cartel Workshop program in Tokyo on February 3-5, I’ve been thinking a lot about the Antitrust Division’s policies on a) leniency and b) not awarding credit for preexisting compliance programs. The two policies were demonstrated very clearly in a well constructed hypothetical dramatization at the Cartel Workshop, complete with mock negotiations between companies and the USDOJ. In the first instance, Company A, arguably the most culpable member of the hypothetical cartel, received leniency. Meanwhile, the second-in company sought credit for its compliance program, but that plea fell on deaf ears. A senior executive at the Vice-President level of the company (and a subordinate) were involved in the cartel and the Antitrust Division does not give credit for failed compliance programs.

Leniency has been touted by the DOJ as the greatest cartel-busting tool in the enforcers’ arsenal. And leniency has become a bedrock of anti-cartel efforts of competition agencies around the world. While there are some differences among leniency programs, leniency has been a great American export. And it works. Leniency undoubtedly prevents cartels from forming because the risk of detection is too high. And, leniency destabilizes cartels that do form because of the likelihood that someone is going to break the ranks of secrecy and inform on the cartel. But, leniency works in part because the incentives to grab the leniency are very high. A company and its executives who were engaged in illegal activity get a complete pass from prosecution. There is no requirement that the leniency company disgorge the illegal profits (though it is assumed that those profits will evaporate through private class action litigation). The leniency company is not put on probation or subject to a compliance monitor. There is no requirement that culpable executives be fired or at least removed from their current position. There is not even a requirement that the leniency company engage in any remedial measures to enhance its compliance program. Many of these ideas to impose some remedial measures on the leniency “winner” have been suggested to the Antitrust Division, but the Division is not in a mood to add any requirements that might give a leniency company even slightly less incentive to come forward. Leniency works, and the government does not want to mess with success.

Fair enough, but now compare the treatment of the leniency winner with the second-in that seeks some credit for their compliance program, which admittedly has failed. The second-in may be, and often is, less culpable than the leniency company. And, as the Antitrust Division often notes, the second-in may have missed the leniency marker by minutes. The Division’s response to a plea for credit for a compliance program is “The Sentencing Guidelines don’t give any credit for a failed compliance program [with the participation of high-level executives]. Why should we?” I think there are two answers to the “Why should we give credit for a failed compliance program?” The first answer is that like leniency, compliance programs help prevent cartels from forming and destabilizes existing cartels. Bona fide compliance programs certainly reduce the formation of cartels. Just as you can’t quantify the number of cartels that do not form because of leniency, it would be impossible to quantify the number of cartels that would not form if senior executives had a glimpse of the parade of horribles that await them for involvement in a cartel. But, no one disputes that a robust competition compliance program and training will result in fewer cartels.

Compliance programs that have mechanism for detection of and reporting of violations will also destabilize cartels that still might form. A cartel generally involves many individuals in a company at different levels of authority. A subordinate who has antitrust compliance training, a hotline and a grudge (for any reason), is a weak link in the cartel code of silence. Just as leniency breeds distrust among cartel members, a compliance hotline might give senior executives a second thought about delegating execution of the cartel to subordinates. The more concerned a senior executive is about lower-level employees “blowing the whistle,” the fewer whistles will be given out. The smaller the circle of people within a company who are available to help carry out a cartel, the less likely it will be effective or that someone will inform on the cartel.

Preventing the formation of cartels and destabilizing them are rational reasons for the Antitrust Division to give credit for existing compliance programs. The Division has now given credit for a “forward looking” compliance program (i.e. a program instituted once the company is caught in a violation and begins to immediately cooperate.) The Antitrust Division has explained the components of a reward-worthy program in the sentencing memorandum in United States v. Kayaba Corp., S.D. Ohio, No. 15-cr-00098, Dkt. 21, (Oct. 5, 2015). It is not logical to give no credit for such a compliance program if it is in place before the violation occurred, but to allow a company with no compliance program to get credit if it takes these measures after getting caught.

The second reason the Antitrust Division should adopt a policy of giving credit for compliance programs that meet the Kayaba standard is because it is the right thing to do. The Division has done a great job of increasing the deterrence side of cartel enforcement with ever-increasing penalties. Jail sentences are measured in years, not months, the Division seeks extradition whenever it can; foreign executives (the vast majority of defendants in international cartel cases) have their lives seriously negatively impacted just by being indicted and put on Red Notices. As the “stick” gets heavier, however, the fair thing to do is to dangle a carrot to encourage companies to educate their employees about competition law and the serious consequences that await executives caught in a price-fixing cartel. This is an excerpt from my Law 360 article:

One of the parts of the job [when I was a prosecutor with the Antitrust Division] where my white hat seemed a little off-color was when prosecuting a lower-level employee who had had no competition law compliance training, and who was ordered by the boss to engage in the illegal activity. This was a particularly difficult situation with mid-to lower-level foreign executives — the vast majority of international cartel defendants. To be sure, the employee had an idea that what he was doing was not legal, but perhaps little appreciation of the consequences: up to 10 years in jail, red notices, extradition, etc. The subordinate also may have had no way to report the conduct anonymously, or otherwise.

In other words, as the Antitrust Division increases the pound of flesh it seeks for a cartel violation, it should do what it can to encourage compliance programs and training–complete with a way for subordinates to report illegal conduct anonymously. Encouraging compliance programs and training is not going to have the effect on destabilizing cartels that leniency has. But, encouraging compliance programs can come at relatively little cost. The Antitrust Division can still require a guilty plea from the company–and an executive who has had compliance training and crossed the line anyway, might merit even more serious jail time. The cost of rewarding bona fide compliance programs would be modest and worth the price of encouraging compliance with the law–before a violation occurs.

In the interest of full disclosure, I should note that I was not always a fan of “credit for compliance programs.” My view was that compliance programs should be incentivized by adding an upward adjustment for a company that did not have a rigorous antitrust compliance program and training. I also thought an executive who directed subordinates to engage in cartel activity, who was high up enough in the company to institute compliance training and chose not to, should get an upward adjustment. It is especially foul play to order a subordinate to break the law in an organization that has no compliance program or training. I submitted comments to the Sentencing Commission along these lines (here). But, I have come around to the idea that the Antitrust Division should also offer the incentive of a reward for a robust compliance program, even if some knucklehead(s) violate the program. One thing I did not fully appreciate when I was with the Antitrust Division is that companies have limited compliance budgets and it is difficult to get resources allocated to competition compliance programs when the Antitrust Division does not give credit for compliance programs and the Criminal Division does.

This is a subject that deserves more attention than a blog post, and I hope to continue to learn and write in this area. If you have any thoughts, or real life experiences from the trenches that are relevant, I’d love to hear from you.

Thanks for reading.

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Good points, Robert. Plus, if the Division recognizes effective programs it gives them the leverage to push companies to enhance their compliance efforts, as has been done in FCPA enforcement. I also think the Division should require those admitted into Leniency to have or enhance their compliance programs. The number of companies that would not seek leniency because of such a requirement is exactly zero. Cheers, Joe

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The US Supreme Court has called cartels "the supreme evil of antitrust." Price fixing and bid rigging may not be all that evil as far as supreme evils go, but an individual can get 10 years in jail and corporations can be fined hundreds of millions of dollars. This blog will provide news, insight and analysis of the world of cartels based on the many years my colleagues and I have as former feds with the Antitrust Division, USDOJ.